By Yakuta Dawood
Recently, the Central Bank of Sri Lanka (CBSL) imposed a maximum interest rate of 5% for foreign currency deposits from Authorized Commercial Banks (LCB) and National Savings Bank (NSB).
This topic is important because this CBSL measure will now eliminate the interest rate anomaly that prevailed in the domestic market between the interest rates offered by banks on foreign currency deposits and rupee deposits.
Responding to our question via email, CBSL Secretary to Governor Erandi Liyanage said that through this implementation, CBSL expects it will encourage more foreign exchange taxpayers to convert their revenues into Rupees, thereby helping to further improve currency liquidity in the domestic foreign exchange market. .
Prior to the establishment of a 5% cap on exporters‘ dollar deposit rates, the interest rates offered on foreign currency deposits by domestic banks were much higher than their corresponding average international interest rates. , while some banks offered rates even higher than the corresponding rates. deposit rate in rupees.
“This anomaly affected the liquidity of currencies in the domestic foreign exchange market, as currency holders preferred to hold currencies, given the higher yields. In this context, the aim of this measure was to remedy the above interest rate anomaly between foreign and domestic currency deposits, ”Liyanage said.
In issuing a press release on the matter, CBSL said on August 24 that the maximum interest rate offered or paid by an LCB and NSB on all foreign currency deposits would not exceed an annual effective rate of up to ‘at 5%. However, in the case of Special Deposit Accounts (CDS), the interest rate may be higher than this rate.
Response from local banks
Sunday morning business spoke to several commercial banks to get their expertise on this hot topic. Speaking to us, Commercial Bank of Ceylon PLC Chief Financial Officer (CFO) Nandika Buddhipala said the effectiveness of this measure will depend on how consumers adopt it, their speculative perception, the availability of the dollar and the interest rate. preferential in the rupee and the dollar.
“It is a little too early to comment on the effectiveness of this implementation. We’ll have to wait and see the behavioral pattern of consumer reaction to this, because there will be people with different goals, perceptions and ways of thinking, ”Buddhipala explained.
He said that since exchange rates depreciate from what they used to be, customers with savings in dollars or any other currency would now start to rejoice in this implementation initiated by CBSL.
We also spoke to the Managing Director of Bank of Ceylon (BOC) – Treasury Nadira Jeewantha, who said it was a good move on the part of CBSL as they would keep deposits, especially income from export, in a single bank, rather than constantly changing their deposits. from one bank to another depending on the rate of return.
“All banks will now have the same interest limit on foreign currency deposits, which means that this will help a bank to hold onto its deposits rather than allowing exporters to transfer money to other banks that have a high interest rate, ”Jeewantha said.
Expressing similar views, Deputy Managing Director of BOC – Corporate and Offshore Banking WNP Surawimala also said that this was a good move from CBSL as the industry was not benefiting from it prior to this implementation. .
However, Sampath Bank was unable to comment at the time of going to press, and all attempts to reach the People’s Bank and the National Development Bank (NDB) have been unsuccessful.
Other policy measures implemented by CBSL
In order to remedy the imbalances in the external sector, the CBSL decided on August 6 to increase the rate of the permanent deposit facility (SDFR) and the rate of the permanent loan facility (SLFR) of the Central Bank by 50 points. base each at 5.00% and 6.00. %, respectively.
At the same time, in order to tighten the stance of monetary policy, with effect from September 1, the Monetary Council increased the reserve requirement ratio (SRR) applicable to all rupee deposits from BLT.
“The Council expects these monetary policy decisions to correct existing imbalances in domestic financial markets and the external sector of the economy, while preventing the build-up of excessive inflationary pressures over the medium term, thereby promoting a great macroeconomic stability, “he added. CBSL noted.
Regarding the interest rate, CBSL said that due to the low interest rate environment in Sri Lanka, credit to the private sector has grown strongly in the first half of 2021, exceeding l annual credit expansion observed in 2019 and 2020.
“The upward adjustments in market interest rates and the expected liquidity gap in the domestic money market would also help the economy to absorb the large amount of foreign currency held by the public seen since the onset of the pandemic at the start of this year. 2020 “, continues the CBSL report. noted.
However, CBSL added that even with a limited conversion of exporters and increasing imports, as well as some speculative activity, caused by anomalies between interest rates on the rupee and foreign exchange products in the financial market which exerted undue pressure on the exchange rate in the domestic market, CBSL was still able to meet all government debt service obligations on time, including settlement of the International Sovereign Obligation (ISB) of $ 1 billion at the end of July 2021.
Referring to estimates released by the Census and Statistics Department (DCS), the economy experienced a stronger-than-expected recovery in the first quarter of 2021, recording real growth of 4.3% year-on-year (YoY ).
Reflecting on this, the CBSL report mentioned that the economy is set to record a higher growth rate in the second quarter of 2021, with projections suggesting that the real economy will grow by more than 5%. in 2021 due to the sharp contraction observed in the corresponding quarter. of the previous year.
“Possible disruptions in national economic activity due to the re-emergence of the Covid-19 pandemic and associated preventive measures could weaken the recovery to some extent in the second half of 2021. Nonetheless, with the successful deployment of vaccination National Covid-19 program and government strategy to impose only selective mobility restrictions, business momentum is expected to continue over the coming period, ”CBSL added.
Coping with the pressure of foreign exchange reserves
Regardless of previous attempts to reduce the foreign exchange reserve problem, Sri Lanka has struggled to maintain or improve its reserve position as the country’s import coverage was on a downward trajectory, ICRA Lanka reported, releasing its mid-year economic update.
Speaking to us earlier this month, former CBSL Deputy Governor Dr WA Wijewardena said the reserve position in Sri Lanka has fallen to a critical level of around 2.8 billion. of dollars, for which the country must save the use of foreign currency until the better and larger influx.
Dr Wijewardena, via his Twitter, shared: “The Central Bank had sold 13 tonnes of gold in February and may be tempted to sell the remaining six tonnes to boost liquid forex; it’s done, no more gold; and the SDR allocation promised by the IMF in August will bring reserves to $ 3.6 billion.
He further said the country was grappling with the deadliest variant of Covid-19 and that the government should seek immediate foreign aid measures to stabilize the country’s failing economy.
“The situation is alarming day by day as the increase in Covid-19 cases; Finance Minister Basil Rajapaksa should come up with a workable plan immediately to convince the international community that we are moving in the right direction; otherwise, no other choice but to crack the imports further (sic)“, added his post on Twitter.
Meanwhile, Minister of State for Money, Capital Market and State Enterprise Reforms Ajith Nivard Cabraal, addressing Sunday morning business, said several opposition groups have speculated on the level of Sri Lanka’s foreign exchange reserves and tried to push through a status of instability.
“Right now, there is an economic challenge ahead of us with the reduction in the number of our foreign exchange reserves. But it started during the period of the previous Yahapalana government. However, I have to say that it is not at an alarming level, ”he said.
However, he added that with the inflows expected over the next few months – such as swaps from India and Bangladesh, flows of International Sovereign Bonds (ISBs) held by local banks and lending from the Development Bank of China – the country’s currency pipeline would be improved. with nearly $ 2,650 million in the coming months.
“This can be viewed and could therefore be included in his effective reservations. In addition, arrangements are being made to roll over almost all of the Sri Lanka Development Bonds (SLDB) and Foreign Currency Banking Unit (FCBU) loans that mature over the remainder of the year. Thus, these deadlines will not lead to a reduction in the reserve, ”he added.